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How to use Client Segmentation in your Financial Planning Practice

By Joel Redmond, CFP

Humans seem to have an instinct for categorization that is truly congenital – most of our early learning is based on prior generations’ efforts at listing, organizing, prioritizing.  In chemistry we learn the diagram of a hundred or so substances that all matter consists of. In history and the natural sciences we see the efforts of those before us to map and chart cities, counties, continents – and galaxies. We read the classics, which teach us to categorize further. Shakespeare divided human life into seven ages: the infant, schoolboy, lover, and soldier; then the justice, the aged, and the second child. It seems that, if we can make something into a list or table, we have a better chance at understanding it.

Is this tidy logic apparent in the realm of financial planning? It seems so. Traditional brokerage firms spend enormous sums of money hiring practice management consultants who say common-sensical things like “segment your book of business” and “replicate your best clients.” Financial services firms look with solicitous awe at the work of those who seem to have truly mastered the art of “time management” – another expression for simply making sure you spend most of your day doing what matters.

From these efforts of ages past and present, it seems evident that this science of organization extends considerably to financial planners’ relationships with their clients. How is this done, though? Rather than advocate for one way, let’s look at three separate methods.

Client Segmentation: 3 Methods 

The first method is simple: look at the amount of money the client generates. This can be assets under management/administration, or commission/fee revenue. The advantages to this method are that it’s extremely uncomplicated, and starkly evident – the numbers are the numbers. The main disadvantage is that this method can be an ultra-incubator for conflicts of interest. De Balzac said behind every great fortune is a crime; many financial crimes are in fact committed because of an excessive focus on the compensation clients are able to generate.

A second way to categorize or segment clients is to combine quantitative elements of client relationships with qualitative elements of those relationships. For example, instead of merely dividing a book of clients by account size, we can divide them into three categories: assets under management, receptivity toward the planner and her services, and ambassadorship – a willingness to “go tell it on the mountain” when things go well. Here, an irascible and difficult client with a $2MM account may score lower than an affable client with $250M who is a nonstop recruiting ad for the planner.

One other way to categorize clients is by what phase of their financial lives they’re involved in. Traditionally, there are four phases of client wealth: building, protecting, distributing, and transferring. Typically those in the building phase are younger and require different handling than those who have already built, and are concerned about keeping what they’ve got (protecting); getting paid from it (distributing); and making sure it goes where it’s supposed to when they’re gone (transferring). Two clients with identical financial statements, but polemically opposite estate planning goals, belong in different categories.

Client Segmentation Outcomes

There is an aspect of undertaking this process that can create a disparate effect among clients: telling them what category they’re in. If our client is an “A” client, telling them so may propel them to Elysium. On the other hand, breaking the news of their less-than-esteemed status to lower-end clients requires us to have a little of the corporate killer in us – it takes finesse to be able to fire someone elegantly. (If we’re telling them, we’re probably going to let them go sooner or later, no?) Imagine how we’d feel if we thought we were the ninth-inning closer, only to be told we weren’t leaving the dugout. If we want to reproduce this feeling in our lower-end clients, we need just tell them their status.

Despite these difficulties, segmenting our client relationships allows us to serve the clients we genuinely want to – without doing disservice to the ones we don’t want to. When this occurs, the innate instinct we have for harmony, precision, and symmetry leaps – it recognizes we’ve met our calling and created a practice that echoes the beautiful, bewitching patterns of the natural order. This is more than sound planning; this is planning of the highest and best purpose. Such is our calling.

 

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